Individual Taxation Exam Bank
Course Introduction
This course provides a comprehensive examination of the federal income taxation of individuals in the United States. Topics include the determination of gross income, deduction of expenses, calculation of taxable income, tax credits, and the fundamental principles underlying tax liability for individuals. The course covers basic tax concepts, filing requirements, computation of tax rates, exclusions, and tax planning strategies. Students will also explore concepts such as capital gains and losses, itemized deductions versus standard deductions, and the impact of life events on tax responsibilities. Practical application through case studies and preparation of individual tax returns is emphasized to develop a foundational understanding of the U.S. tax system from the individuals perspective.
Recommended Textbook
South Western Federal Taxation 2018 Individual Income Taxes 41st Edition by William
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Page 2
H. Hoffman
Chapter 1: An Introduction to Taxation and Understanding
Federal Tax Law
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Sample Questions
Q1) Without obtaining an extension, Pam files her income tax return 55 days after the due date. With her return, she pays an additional tax of $60,000. Disregarding any interest element, what is Pam's penalty for failure to pay and to file?
Answer: $6,000. Disregarding the interest element, Pam's total penalties are as follows:
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Q2) In terms of probability, which of the following taxpayers would be least likely to be audited by the IRS?
A)Taxpayer owns and operates a check-cashing service.
B)Taxpayer is an employed electrician.
C)Taxpayer just received a $3 million personal injury award as a result of a lawsuit.
D)Taxpayer just won a $1 million slot machine jackpot at a Las Vegas casino.
E)Taxpayer has been audited several times before.
Answer: B
Q3) A small business corporation can elect to avoid the corporate income tax.
Answer: a
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Chapter 2: Working With the Tax Law
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Q1) Tax planning usually involves a completed transaction.
A)True
B)False
Answer: False
Q2) Which statement is not true with respect to a Regulation that interprets the tax law?
A)Issued by the U.S. Congress.
B)Issued by the U.S. Treasury Department.
C)Designed to provide an interpretation of the tax law.
D)Carries more legal force than a Revenue Ruling.
E)All of these statements are true.
Answer: A
Q3) What administrative release deals with a proposed transaction rather than a completed transaction?
A)Letter Ruling
B)Technical Advice Memorandum
C)Determination Letter
D)Field Service Advice
E)None of these
Answer: A
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Page 4
Chapter 3: Tax Formula and Tax Determination; an
Overview of Property Transactions
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Q1) In 2017, Ed is 66 and single. If he has itemized deductions of $7,400, he should not claim the standard deduction alternative.
A)True
B)False
Answer: False
Q2) For 2017, Tom has taxable income of $48,005. When he uses the Tax Tables, Tom finds that his tax liability is higher than under the Tax Rate Schedules.
a.Why is there a difference?
b.Can Tom use the Tax Rate Schedules?
Answer:
11ea84d6_5820_6ff3_a79c_1ff63457da77_TB1280_00
Q3) Nonresident alien
Answer: d
Q4) Sarah furnishes more than 50% of the support of her son and daughter-in-law who live with her. If the son and daughter-in-law file a joint return, Sarah cannot claim them as dependents.
A)True
B)False
Answer: False
Page 5
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Chapter 4: Gross Income: Concepts and Inclusions
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Q1) Under the terms of a divorce agreement, Lanny was to pay his wife Joyce $2,000 per month in alimony and $500 per month in child support. For a twelve-month period, Lanny can deduct from gross income (and Joyce must include in gross income):
A)$0.
B)$6,000.
C)$24,000.
D)$30,000.
E)None of these.
Q2) José, a cash method taxpayer, is a partner in J&T Accounting Services, a calendar year partnership. Under the partnership agreement, José is to receive 20% of the partnership's profits or losses. Each partner is allowed to withdraw $10,000 each month for his or her living expenses. José withdrew $120,000 during the year as his monthly draw in 2017. However, in December the partnership was short on cash and José was required to invest an additional $10,000 in the partnership. In March 2017, José received $40,000 as his share of distributed 2016 profits. The partnership earnings before partners' withdrawals for 2017 totaled $1 million. Compute José's gross income from the partnership for 2017.
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Chapter 5: Gross Income: Exclusions
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Q1) Emily is in the 35% marginal tax bracket. She can purchase a York County school bond yielding 3.5% interest and the interest is not subject to a 5% state tax. But she is interested in earning a higher return
For comparable risk. Which of the following is correct:
A)If she buys a corporate bond that pays 6% interest, her after-tax rate of return will be less than if she purchased the York County school bond.
B)If she buys a U.S. government bond paying 5%, her after-tax rate of return will be less than if she purchased the York County school bond.
C)If she buys a common stock paying a 4% dividend, her after-tax rate of return will be higher than if she purchased the York County school bond.
D)All of these are correct.
E)None of these are correct.
Q2) If a tax-exempt bond will yield approximately .65 (1 - .35) times the yield on a taxable bond of equal risk, who benefits from the tax exemption: the Federal government, the state and local governments who issue the bonds, or the investors?
Q3) What Federal income tax benefits are provided for college students?
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Chapter 6: Deductions and Losses: in General
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Q1) Briefly explain why interest on money borrowed to buy tax-exempt municipal bonds is disallowed as a deduction.
Q2) In distinguishing whether an activity is a hobby or a trade or business, discuss the presumptive rule.
Q3) If a vacation home is rented for less than 15 days during a year, the only expenses that can be deducted are mortgage interest, property taxes, and personal casualty losses.
A)True
B)False
Q4) Sandra sold 500 shares of Wren Corporation to Bob, her brother, for its fair market value. She had paid $26,000 for the stock. Calculate Sandra's and Bob's gain or loss under the following circumstances:
a.Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $18,000.
b.Sandra sold the shares to Bob for $30,000. One year later, Bob sold them for $27,000.
c.Sandra sold the shares to Bob for $20,000. One year later, Bob sold them for $28,000.
Q5) What losses are deductible by an individual taxpayer?
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Chapter 7: Deductions and Losses: Certain Business
Expenses and Losses
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Q1) The excess of nonbusiness capital gains over nonbusiness capital losses must be added to taxable income to compute the net operating loss of an individual.
A)True
B)False
Q2) Why was the domestic production activities deduction (DPAD) enacted by Congress?
Q3) Al, who is single, has a gain of $40,000 on the sale of § 1244 stock (small business stock) and a loss of $80,000 on the sale of § 1244 stock. As a result, Al has a $40,000 ordinary loss.
A)True
B)False
Q4) An individual may deduct a loss on rental property even if it does not meet the definition of a casualty loss.
A)True
B)False
Q5) A theft loss is taken in the year of the theft.
A)True
B)False
Q6) Discuss the tax treatment of non-reimbursed losses of an employee in connection with a trade or business. Page 9
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Page 10
Chapter 8: Depreciation, Cost Recovery, Amortization, and Depletion
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Sample Questions
Q1) On May 2, 2017, Karen placed in service a new sports utility vehicle that cost $60,000 and has a gross vehicle weight of 6,300 lbs. The vehicle is used 60% for business and 40% for personal use. Determine Karen's total cost recovery for 2017. Karen wants to use both §179 and additional first-year depreciation.
A)$7,200
B)$25,000
C)$27,200
D)$31,600
E)None of the above
Q2) On June 1, 2017, Gabriella purchased a computer and peripheral equipment (five-year property) for $25,000. She used the assets 40% for business, 50% for the production of income, and 10% for personal use. These are the only assets Gabriella purchased during the current year. Determine her total cost recovery deduction for the current year.
Q3) Property used for the production of income is not eligible for § 179 expensing.
A)True
B)False
Q4) Discuss the beneficial tax consequences of an SUV not being classified as a passenger automobile.
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Chapter 9: Deductions: Employee and
Self-Employed-Related Expenses
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Q1) Qualified moving expenses include the cost of lodging but not meals during the move.
A)True
B)False
Q2) Marvin lives with his family in Alabama. He has two jobs: one in Alabama and one in North Carolina. Marvin's tax home is where he lives (Alabama).
A)True
B)False
Q3) Characteristic of a taxpayer who is self-employed
Q4) A taxpayer who claims the standard deduction will not be able to claim an office in the home deduction.
A)True
B)False
Q5) Regarding tax favored retirement plans for employees and self-employed persons, comment on the following:
a.The exclusion versus deduction approaches as to contributions by participants.
b.Tax-free accumulation of earnings.
c.The deferral of income tax consequences.
d.Employee versus self-employed status.
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Chapter 10: Deductions and Losses: Certain Itemized
Deductions
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Q1) Sergio was required by the city to pay $2,000 for the cost of new curbing installed by the city in front of his personal residence. The new curbing was installed throughout Sergio's neighborhood as part of a street upgrade project. Sergio may not deduct $2,000 as a tax, but he may add the $2,000 to the basis of his property.
A)True
B)False
Q2) Grace's sole source of income is from a restaurant that she owns and operates as a proprietorship. Any state income tax Grace pays on the business net income must be deducted as a business expense rather than as an itemized deduction.
A)True
B)False
Q3) Excess charitable contributions that come under the 30%-of-AGI ceiling are always subject to the 30%-of-AGI ceiling in the carryover year.
A)True
B)False
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Chapter 11: Investor Losses
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Sample Questions
Q1) Treatment of a disposition of a passive activity at death.
Q2) Judy incurred $58,500 of interest expense this year related to her investments. Her investment income includes $15,000 of interest, $9,000 of qualified dividends, and a $22,500 net capital gain on the sale of securities. The maximum amount of Judy's investment interest expense deduction for the year is:
A)$15,000.
B)$24,000.
C)$37,500.
D)$46,500.
E)None of the above.
Q3) Art's at-risk amount in a passive activity was $60,000 at the beginning of 2016. His loss from the activity in 2016 is $80,000, and he had no passive activity income during the year. Art had $20,000 of passive activity income from the activity in 2017. Under the passive activity loss rules, Art's suspended loss at the end of 2017 is:
A)$15,000.
B)$20,000.
C)$45,000.
D)$60,000.
E)None of the above.
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Page 14
Chapter 12: Alternative Minimum Tax
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Sample Questions
Q1) AMT adjustments can be positive or negative, whereas AMT preferences are always positive.
A)True
B)False
Q2) Andrea, who is single, is entitled to a personal exemption deduction in calculating her 2017 taxable income. She has no dependency exemptions. What is the amount of the AMT adjustment in calculating AMTI?
Q3) In 2017, Blake incurs $270,000 of mining exploration expenditures, and deducts the entire amount for regular income tax purposes. Which of the following statements is correct?
A) For AMT purposes, Blake will have a positive adjustment of $243,000 in 2017.
B) Blake will have a negative AMT adjustment of $27,000 in 2021.
C) Over a 10-year period, positive and negative adjustments for mining exploration expenditures will net to zero.
D) Only a. and c. are correct.
E) a., b., and c. are correct.
Q4) Are the AMT rates for the individual taxpayer the same as those for a corporate taxpayer?
Q5) Why is there no AMT adjustment for charitable contributions?
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Chapter 13: Tax Credits and Payment Procedures
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Q1) The tax benefit received from a tax credit is never affected by the tax rate of the taxpayer.
A)True B)False
Q2) The tax credit for rehabilitation expenditures for certified historic structures differs from that for qualifying structures that are not certified historic structures.
A)True B)False
Q3) A LIFO method is applied to general business credit carryovers, carrybacks, and utilization of credits earned during a particular year.
A)True
B)False
Q4) The credit for child and dependent care expenses is an example of a refundable credit.
A)True B)False
Q5) How does the FICA tax compare to the self-employment tax? How are these two taxes similar and how do they differ?
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Chapter 14: Property Transactions: Determination of Gain or
Loss and Basis Considerations
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Q1) In 2013, Harold purchased a classic car that he planned to restore for $12,000. However, Harold is too busy to work on the car and he gives it to his daughter Julia in 2017. At this time, the fair market value of the car has declined to $10,000. Harold paid no gift tax on the transaction. Julia completes some of the restoration herself with out-of-pocket costs of $5,000. She later sells the car for $30,000. What is Julia's recognized gain or loss on the sale of the car?
A)$0
B)$13,000
C)$15,000
D)$18,000
E)None of the above
Q2) Arthur owns a tract of undeveloped land (adjusted basis of $145,000) which he sells to his son, Ned, for its fair market value of $105,000. What is Arthur's recognized gain or loss and Ned's basis in the land?
A)$0 and $105,000.
B)$0 and $145,000.
C)($40,000) and $105,000.
D)($40,000) and $145,000.
E)None of the above.
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Chapter 15: Property Transactions: Nontaxable Exchanges
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Q1) Myrna's personal residence (adjusted basis of $100,000) was condemned, and she received a condemnation award of $80,000. Myrna used the condemnation proceeds to purchase a new residence for $90,000. What is her recognized gain or loss and her basis in the new residence?
A)$0; $70,000.
B)$0; $90,000.
C)($20,000); $90,000.
D)($20,000); $70,000.
E)None of the above.
Q2) If boot is received in a § 1031 like-kind exchange that results in some of the realized gain being recognized, the holding period for both the like-kind property and the boot received begins on the date of the exchange.
A)True
B)False
Q3) What requirements must be satisfied for a delayed swap to qualify for § 1031 like-kind exchange treatment?
Q4) Discuss the relationship between realized gain and boot received in a § 1031 like-kind exchange.
Q5) What kinds of property do not qualify under the like-kind provisions?
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Chapter 16: Property Transactions: Capital Gains and Losses
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Q1) Hank inherited Green stock from his mother when she died. The mother had a tax basis of $366,000 for the Green stock when she died and the Green stock was worth $437,000 at the date of her death. Which of the statements below is correct?
A) Hank's holding period for the Green stock includes his mother's holding period for the stock.
B) Hank's holding period for the Green stock does not include his mother's holding period for the stock.
C) Hank's holding period for the Green stock is automatically long term.
D) b. and c.e. None of the above.
Q2) The possible holding periods for capital assets include:
A)Short-term = held 14 months or less.
B)Long-term = greater than six months.
C)Long-term = greater than 12 months.
D)Short-term = greater than 12 months.
E)None of the above.
Q3) If a capital asset is sold at a gain, the holding period is important.
A)True
B)False
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Chapter 17: Property Transactions: 1231 and Recapture
Provisions
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Q1) An individual business taxpayer owns land on which he grows trees for logging. The land has been held more than 10 years and the trees growing on the land were planted eight years ago. Normally, the timber would be inventory for this taxpayer, but the tax law allows the taxpayer to elect to treat cutting the timber as the disposition of a § 1231 asset.
A)True
B)False
Q2) A personal use property casualty loss is generally deductible only to the extent it exceeds 10% of AGI.
A)True
B)False
Q3) Vanna owned an office building that had been held more than one year when it was sold for $567,000. The real estate had an adjusted basis of $45,000 for the land and $233,000 for the building. Straight-line depreciation of $162,000 had been taken on the building. What is the amount and initial character of the gain or loss from disposition of the real estate? Is any of the gain unrecaptured § 1250 (25%) gain?
Q4) A sheep must be held more than 18 months to qualify as a § 1231 asset.
A)True
B)False
Page 20
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Chapter 18: Accounting Periods and Methods
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Q1) Using your knowledge of GAAP and financial reporting, list and explain one good reason why GAAP should not be used for tax purposes and one good reason why it should be used.
Q2) In the case of a taxpayer who uses the lower-of-cost-or-market inventory method:
A)Taxpayers may not use the lower of cost or market method for tax purposes.
B)Market price means the expected selling price.
C)Taxpayers may deduct a reserve for anticipated inventory price changes.
D)Each inventory item must be valued at the lower of its cost or its market value.
E)None of the above.
Q3) If a company uses the LIFO inventory method to report the cost of inventory and cost of goods sold on its financial statements, footnote disclosure of the income as calculated by the FIFO method does not violate the tax and financial accounting conformity requirement.
A)True
B)False
Q4) A C corporation that does not have a natural business year must use a calendar year as its tax year.
A)True
B)False
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Chapter 19: Deferred Compensation
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Q1) Saysha is an officer of a local bank that merges with a national bank, resulting in a change of ownership. She loses her job as a result of the merger, but she receives a cash settlement of $390,000 from her employer under her golden parachute. Her average annual compensation for the past five tax years is $110,000. Calculate any nondeductible excise tax Saysha must pay, if any.
A)$0.
B)$56,000.
C)$110,000.
D)$280,000.
E)Some other amount.
Q2) Deidre has five years of service completed as of February 5, 2017, her employment anniversary date. If the defined benefit plan [not a § 401(m) arrangement] uses the cliff vesting schedule, determine Deidre's nonforfeitable percentage.
A)0%
B)60%
C)80%
D)100%
E)None of the above
Q3) What is a highly compensated employee?
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Chapter 20: Corporations and Partnerships
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Q1) If the basis of a partnership interest is exhausted, a partner can use loans made to the partnership to absorb excess losses.
A)True
B)False
Q2) The taxable income (or loss) of an S corporation is allocated to each shareholder on a per-share and per-day of stock ownership basis.
A)True B)False
Q3) The foreign tax credit is available only to individuals and not to C corporations.
A)True B)False
Q4) Why were the check-the-box Regulations issued?
Q5) In terms of the pass-through of tax attributes to the owners, both partnerships and C corporations follow the conduit approach.
A)True B)False
Q6) Dividends received deduction is not available.
Q7) A shareholder cannot have a negative basis in his or her stock investment.
Page 23
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